The Big Bang
How much of a bang could you make with $4 trillion...?
AND SO THE WEEK begins with a bang! writes Dan Denning, reporting down under for The Daily Reckoning Australia.
According to the Financial Times, "The Obama administration is gearing up for a 'big bang' announcement within the next two weeks that will combine a bank clean-up with measures to reduce home foreclosures and probably steps to kick-start credit markets."
Obama as Prime Mover will have to turn the chaos in America's housing and mortgage market into harmonious order. Then he has to singlehandedly leap a tall legacy of toxic assets in a single bound, freeing up banks to lend by buying all of their dodgy assets.
It's a big ask. But if anyone can do it, he can. Especially when he's got America's credit rating to abuse!
Reordering the financial universe is not cheap. It takes a lot of energy and a lot of matter in the form of new US dollars. Reuters reports that, "Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included."
How much is $4 trillion? "At $4 trillion, that would be the equivalent of nearly one-third of US gross domestic product. If the government had to fund that amount by issuing additional debt, it would intensify investor concerns about massive supply scaring off demand."
You can imagine just how pleased the world's main owners of dollar-denominated reserve assets (China, Japan, the Petro states) will be with a $4 trillion increase in dollar denominated debt. But wait a tick...
It's one thing to say you might need to float as much as $4 trillion in debt to fund your bad bank. It's another thing to sell that debt. For who will buy it? Even these days, $4 trillion is a lot of capital to loan. Maybe that number has been floated to make a smaller number...say $2 trillion...look small by comparison.
Then the Feds could announce good news for everyone! The Bad Bank is going to cost us only half as much as we thought!
Either way, if the 'big bang' goes off this week, what will it mean for Planet US Dollar...or Planet Gold? Well, as our friend Steve Belmont in Chicago reported on Friday, gold is moving toward a day of reckoning after trading in a range for the last ten months. It will either break out much higher, Steve says, or buckle. We'll be watching. But it's worth noting that against pretty much everything else – including the Aussie Dollar, Euros, Canadian Loony, British Pound, even the Swiss Franc – Gold Prices just keep hitting new all-time record highs.
While investors hoard cash, politicians in the business of spending your money are mid-way through an obnoxious change in rhetoric. Okay, so we knew Barrack Obama was going to give it to Wall Street, calling executives "shameful" for getting bonuses while their firms received bail-out money from the TARP fundm. (Remember, by the way, the TARP money was forced on some firms in an effort to boost confidence in the overall plan.)
And we normally try to keep a reserved, ironic, and skeptical air when reading the statements of politicians. Most of them are not worth taking seriously. But every once in a while, you get the scent of something so noxious and dangerous that you have to put aside humor and call it what is. Today is one of those days.
The populist shame game is to be expected, of course. That's not a big deal. What's more alarming is the bilge and claptrap spilling from Kevin Rudd's gob and what it may mean for your ability to preserve and create wealth in the coming years.
In The Monthly magazine, Rudd – the Prime Minister of Australia in case you missed him – plants a Neo-Marxist flag in the ground of the current debate with the kind of jargon-laden elitist preening that makes academic critics of the free market who've never spent a day in the business world creating value so nauseating.
Specifically, Rudd writes that "The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes. Neo-liberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy."
Hey! Why not proclaim, since Rudd is apparently in the position to make such proclamations, that the experiment in paper money and the deliberate policy of inflation it implies has been discredited? That it's theft? That it's bureaucratic lust for power and authority disguised as monetary policy?
The paper money experiment is also, at its heart, founded on the false belief that one or a few people in government know better than you and I how we should lead our lives.
But leave it to Rudd and the resurgent global Left to use the present crisis as an occasion to expand their political ideology of government power and wealth confiscation. Despite the fall of the Berlin Wall in 1989, Marxism never really went away. It ensconced itself in Western universities and colleges, and in the careerism of the political class, which believes it is entitled to govern by virtue of its intellectual superiority and the moral justness of its anti-market position.
Their strategy, as always, is to control the rhetorical high ground by framing the discussion in populist terms and making an enemy of "greedy capitalists". Don't get us wrong. There are plenty of greedy capitalists to go around, or just to go to jail. In fact, many more of them would be going out of business if the government would quit propping them up with taxpayer money. This generation of corporate executives shares plenty of blame for playing fast and loose with the corporations they were supposed to be stewards of. They over-levered, over-speculated, and over-paid themselves.
But Rudd is an ignoramus of the lowest order to say that current events somehow negate the last thirty years of globalization, or the last three hundred years of economic growth, improved living standards and life expectancy, and the division of labor. Tens of millions have been lifted out of poverty. Hundreds of millions have more economic and political freedom than ever before.
These results can only be the product of a system in which risk-taking entrepreneurs have access to capital and savings, allocated through competitive markets where firms that deliver real value to consumers thrive and those that don't fail. That system has worked for 300 years of Western history to create wealth, choice, and opportunity.
Shame on Kevin Rudd for calling that "market fundamentalism", as if belief in the institutions that create wealth and liberty is akin to the same kind of religious fundamentalism that permits suicide bombing. If there is a more offensive use of rhetoric to equate two vastly different things, we haven't seen it.
But the Neo-Marxists are back on the march. And they are probably coming for your wages and pension sometime soon. Make no mistake about it. 2009 is the year the Neo-Marxists have been waiting for. It is their chance to undo all the perceived evils of Thatcher and Reagan. There would be plenty of those to undo, of course, not least the idea that deficit spending is morally permissible. But the real push by the Neo-Marxists is to use the present occasion to expand the scope and reach of government power into your private life, so they can tell you what to do, what to watch, what to eat, what car to drive, and ultimately, what to think or say. This will be disguised as better more "parental" regulation to achieve more equality and social justice. But behind the false populist outrage and the elevated language of idealism, it's just another push for government elites to expand their ability to compel you to live the life they think you should lead.
The simple regulatory response to all this is to reduce the amount of leverage available to financial players. Reduce margin lending in shares. Let bankers get back to making prudent loans in the housing market, based on what a buyer can actually repay, rather than letting the government subsidize subprime lending because it's politically desirable.
There are other sensible regulatory responses to the mess, too. But they will be discarded in favor of grandiose and over-reaching plans to redesign the entire world in some utopian image.
A "big bang"...? Really...? Does that mean they're going to blow things up and call it a "fix"...?
What we're getting at is that it's going to be a tremendous challenge to withstand this push in the next few years, mostly because it will have so much popular support from people with no brains who believe in fine-sounding speeches and appreciate getting tax rebates/credits/handouts from the government. The first battle in the war on wealth creation is wealth redistribution, whether you like it or not.
It would be more honest if the Left just came out and said something like, "The last ten years have been a huge wealth transfer from the middle class to Wall Street and from the developed world to the developing world. We're going to try and reverse all that now because we know it's our best shot in the last thirty years to get some back. So here we come! Open your wallet and shut your mouth!"
Neo-liberalism isn't the culprit in all this. What does that word even mean? Isn't Rudd using it because it sounds like Neo-Conservatism? And everyone knows that Neo-conservatism is evil; therefore Neo-Liberalism must be evil too!
The real evil of the last thirty years is the vast expansion of credit in the world that changed personal and corporate incentives. The plunge in the cost of capital – encouraged by governments and central banks – set off an orgy of bad risk taking, quietly condoned by regulators and politicians who all benefitted in some way from housing, commodity and trade booms.
But now the credit cycle has turned. The Credit Depression is upon us. And Comrades Rudd and Obama will try and use it for the next great push in the Neo-Marxist dream – one world government with one world currency.